KASIKORN RESEARCH CENTER (KResearch) holds the view that the decade-long Japanese recession and deflation (from late 1990s to 2000) provides a valuable lesson for policymakers worldwide in tackling the global crisis. Many countries have adopted both monetary and fiscal policies to cope with flagging economies. However, impaired credit and troubled financial markets worldwide are still far from returning to normalcy. It may take some time before clear signs of recovery appear, though the process may not be as protracted as what was experienced by Japan. By that time, the Bank of Japan (BOJ) was quite reluctant to cut their policy rate, compounded by much too slow realization of losses and recapitalization efforts by Japanese financial institutions that occurred along the way. Japan's public spending also fell short of effectiveness in stimulating their economy. Even worse, a premature consumption tax hike exacerbated their weakened economy. As a consequence, it took more than a decade for Japan to emerge from a deep economic slump.
In KResearch's view, we should learn from the Japanese economic crisis that success in tackling economic crises may lie in collective measures. They include easing monetary policy via fast and sufficient policy rate reductions as a preemptive strike against rising risks to growth. At the same time, an appropriate fiscal policy via public spending and tax policy to ensure the highest efficiency to the economic system should be prudently prioritized.
If the economy has yet to get ‘out of the woods', early tax hikes only to achieve fiscal discipline should be avoided as they may do more harm than good to private sector confidence and the overall economy. Moreover, troubled financial institutions should be urged to realize their losses and pursue recapitalization at the earliest possible to dispose of the deteriorating assets, limit their adverse impact on the real economy and keep the financial system functioning normally. Finally, consumer confidence is of paramount importance and should not be overlooked.
Policymakers should make every possible attempt to keep deflation under control to ensure public and business sector confidence; otherwise, an economic downturn may steepen into an abyss. Nonetheless, there is no ;one formula that fits all” in tackling economic woes. We cannot rely on only one element to revive a sagging economy. A variety of solutions appropriate to specific economic structures should be adopted in each economy.
For Thailand, KResearch holds the view that the government has taken the right direction in their policy stance. Short-term measures to restore confidence include the renewal of steps taken previously to relieve consumers' burdens amid a rising cost of living and control falling crop prices. Among the medium and long-term measures to maintain economic stability are tax restructuring and investment in mega-projects. In addition to the effectiveness and worthiness of these plans, the timeframe of implementation and transparency in budgetary spending should be given attention. Permanent tax cuts may be more effective to stimulate private spending than tax reduction on a temporary basis. In our view, the government should put a priority on the enactment of the mid-year supplementary budget for FY2009 totaling THB100 billion, and should accelerate disbursements on the budget, especially the capital expenditures of public agencies, as well as measures to cope with unemployment for both employees and employers.
On the monetary policy front, KResearch views that easing inflationary pressure may give the Bank of Thailand greater leeway to make further rate cuts to control heightened risks to growth in the year ahead. Along with this, the central bank should also ensure that there is adequate liquidity in the system, especially for SMEs, while also overseeing the Baht's movements so that they are consistent with market mechanisms and retain our competitiveness.
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